Barron's Streetwise - Crisis Hits the Car Business, Again

Episode Date: April 17, 2020

Ford CEO Jim Hackett and Wall Street analysts discuss how the pandemic will change the car industry. Learn more about your ad choices. Visit megaphone.fm/adchoices

With record levels of dry powder available for investment, find out what's in store for private markets in 2025 and beyond. Listen to Crafting Capital in partnership with UBS at partners.wsj.com slash UBS, Spotify and Apple Podcasts. There were pundits who said, hey, your business won't be as big in the future because everybody won't own a vehicle. And let's just go to a place where you ask somebody, how do you feel about the impact of the virus in your own vehicle? I mean, I haven't got any data for this, but you know that dynamically people are going to want to keep control of their own spaces in the future. I'm Jack Howe. Welcome to the Barron Streetwise podcast. The person you just heard is Jim Hackett. He's the CEO of Ford Motor Company.

He thinks that in the near term, the pandemic might change how people view services like Uber and Lyft versus owning their own cars. We'll hear more from Hackett and some Wall Street analysts in a moment about how the virus and the dire downturn it has created for car makers, dealers, service shops, and more will change the car business. For now, maybe forever. Hi, Meta. Hi, Jack. So, I have a big victory to tell you about. All right.

I found my keys, my car keys and house keys. They were lost for two weeks. My wife found them, actually. They were on the floor next to the patio door. And it's particularly satisfying because I always leave my keys in the same place. I rarely lose them. It's very frustrating when I do. I try to backtrack my steps.

Sometimes I blame other people who took my keys. Sometimes I get into a metaphysical discussion about how, you know, I know they're here. How can they be here and not be here at the same time? It's very frustrating. What I did this time is I stopped and said to myself, wait a second, I haven't been out of the house for weeks. So the keys are here. I said, you know what, keys, I'm not going to look for you. Wherever I left you, I'm betting I'm going to be in that place again before I'm out of this house. So you know what? It's me and you, Keys, and I'm going to find you. You're coming to me this time.

You guys will come begging for my attention. That's right. And it took two weeks. And you know what? I got to tell you, it feels good to be a winner in your face, Keys. But I think to the point of what we're going to be looking at today, it's unusual to think that I would go for two weeks without missing my car keys. I mean, I usually drive most days. And I think that all across America right

now, people are sitting there with their car keys resting in their drawer and either they're not going anywhere or they're driving much less than they used to. And I think that's having a ripple effect across the economy. I think a lot of people are concerned right now about what it means for car sales, what it means for garages, what it means for this huge portion of the economy that depends on cars. We like to answer listener questions at the end of each episode, but this week we're going to start with one because I got an email from Mark Bowles, who lives outside of Charlotte, North Carolina, and he was asking about cars, and I was thinking about cars, so I asked if I could call him for the podcast. Thank you for calling Bowles Automotive Service Center. This is Mark. How may I help you? I'm going to score that phone greeting a 10 out of 10. Mark tells me he runs a repair shop. We fix everything, gasoline, diesel. We fix hybrid

and also electric vehicles. The concern for me, obviously, with my industry is our future. Hold on one second, please. Hey, Sam. I'm trying to not pick up any background noise because this is being recorded for a podcast. Apologize. What's going on in the background? I've got a person that's awesome. She's coming to help me. She actually does incredible nails at Torrey Johnson Studio next door to our shop. But because of this current situation, the government's closing them down.

So I've got her working here, and she is painting the office for us and, you know, just as the way to make some money. Mark can afford to help out like that now because his customers are still coming despite what's going on in the economy. But he says he's getting worried. I wonder how much of an impact what we're going through now will ripple through the future of the automotive industry. How will this affect investment opportunities in the future? Okay, Mark, I'm going to make some calls to some people who have a deep understanding of the car business. I'm going to see what I can learn, and I'm going to report back to you through the podcast. Sound good? Oh, that sounds awesome, man. Maddie, you think we can help Mark out? I hope so.

Okay, fasten your seatbelts. Start your engine. Don't forget to check the rearview mirror. How long do you think I could go on like this for? I'm cutting you off. Let's start with some basics about the car business. Everyone's familiar with the major car makers like General Motors and Ford and Fiat Chrysler. In recent years, the pace of North American sales has been quite healthy, about 17 million vehicles per year.

There's been a shift away from sedans and towards sport utility vehicles. And U.S. car makers make a lot of their profits from pickup trucks. Meta, have you ever ridden in a pickup truck? Yeah, I have. Really? What kind? I have no idea. I know nothing about cars. Was it a new one or an old one? It was an old one.

Okay. A friend picked me up recently in a new Ford F-150 pickup truck. And while he was driving, he said, here, check this out. He hit a few buttons on the dash, and the truck started giving me a rear-end massage. And that's no exaggeration. Built into the chair, I don't know, there's some kind of device. It's like a spa, this truck. These trucks can run up to $70,000 and come in very luxurious trim levels, and they're incredibly profitable for the companies that make them.

I've never owned a vehicle with a massager like that. I wonder if I did, would I just spend time sitting out in the driveway reading the newspaper? I don't know what to say about that. That's a weird image. I'm getting bad dreams now. So new car sales create a cascade of business for new and used car dealers like AutoNation and CarMax, and also companies that make components for cars like BorgWarner and Aptiv, and stores that sell parts for do-it-yourselfers like AutoZone. One last thing to think about is

what Credit Suisse calls the two clocks. It's a way for investors to think about the car business now. There are the regular ups and downs of buyer demand. That's the first clock. The second clock is the gradual shift from gasoline driven cars to electric ones. That's not going to happen overnight. Morgan Stanley predicts that by the end of the decade, by 2030, maybe one quarter of us will drive electric vehicles. But if you look at the stock market value of Tesla, which is much larger now than the market values of Ford and General Motors combined, it's clear that investors view this as an important trend. Right now, however, there's nothing more important than the pandemic and the industry's survival.

To learn more about that, I called up Garrett Nelson. Hello. Hi, Garrett. It's Jack Howe from Barron's. Hey, Jack. How are you doing? Garrett is an analyst with CFRA, and he covers the auto universe, and I do mean the whole universe. Yeah, so there's about 35 auto-related companies that I cover. Wow, that's a lot to keep track of. Yeah, I think some analysts just follow the manufacturers or just follow the retailers, but I follow the whole supply chain. So I feel like we have a pretty good comprehensive view of what's going on.

That being said, what in the holy hell is going on right now? Oh, my gosh. It's just devastation. How does this compare with anything else you've seen? It's definitely worse than the financial crisis. That's troubling because the financial crisis forced General Motors into bankruptcy protection. The entire industry needed government support, really. Garrett says that might happen again.

I think this is going to be worse than that. So that's why we haven't ruled out the possibility of an eventual bailout. Garrett says CFRA expects a 17% decline in global car sales this year. And that assumes that sales volumes hit bottom in the second quarter, and then they rebound sequentially in the third quarter, and then more so in the fourth quarter. But that's our base case. Things could certainly be worse or better than that. Keep in mind that when Garrett talks about a 17% downturn in sales, he's talking about for the year. We just got numbers for the month of March, and in the U.S. they show a 27%

drop. And March isn't as bad as it's going to get. I mean, we shut down the economy halfway through March. April is the first month where we're going to see what the numbers really look like during the shutdown. More than 80% of car dealers are closed right now. So I would expect April numbers to be disastrous. We're already seeing headlines about furloughs and layoffs. GM's leadership is doing what I think a lot of other companies have either started to do or will be doing, informing employees that they're going to have to cut some costs honda saying today that it will furlough most u.s salaried and support workers for two weeks as a result of the coronavirus nissan is furloughing thousands

of hourly employees at its u.s plants as the auto industry continues to take a beating from the coronavirus pandemic. This is obviously important for anyone who works in the car industry and for anyone who invests there. But really, this is important for all of us. Manufacturing of cars and parts for cars, that employs close to a million people in the U.S. And the retail side of the business, selling cars, selling parts, that employs 2 million people. Many of these jobs are good paying jobs where you can support a family. And the workers are the customers, by which I don't just mean that car workers also buy cars. I mean, car workers buy everything. They buy family vacations. They take trips to the store. They buy all of the things

that we need for them to buy to keep our economy functioning. So their well-being affects all of us. The big car makers are so important to the rest of the ecosystem that I wanted to see how they're doing. I reached out to Jim Hackett. He runs Ford. Jim Hackett. Hi, Jim. Thanks for making a few minutes to speak with me. Jim talked about Ford coming up on its 117th birthday and having endured things like world wars and more recently having learned important lessons during the great recession of 2008. Remember Ford didn't take any bailout money. It was able to manage itself. It was really tough and a big challenge, but it did it.

Well, think of that influenced us tremendously that said, if you ever face a challenge again, you really want to be ready. So we are really ready this time. Ford says it expects to report a big loss during the first quarter. Pretty much everyone was expecting that. to report a big loss during the first quarter. Pretty much everyone was expecting that. What matters now is balance sheet strength. The company has suspended its dividend. It has deferred parts of executive salaries. It has $30 billion in cash reserves and says that's probably enough to hold it through the third quarter, even without the car business reopening.

And Jim is optimistic. We have a vibrancy that we can come back to, not only economically, but from a health perspective. So I'm looking at the auto business as a bounce back. I think that we will bounce back. So how might the car business change after the virus is gone? Jim told me one interesting detail about making car interiors, maybe steering wheels, dashboards, with things that can kill viruses. These things, they're nano-level structures that are in the fabrics. If you put your hand, you can't feel them. But if you had a microscope, they look like you're putting a virus on top of

arrows. And so the virus can't, it can't live. It punctures it literally. Jim also mentioned the ride-sharing economy. That's services like Uber and Lyft. One concern among investors is that younger drivers especially might turn to those services instead of owning cars themselves. And Jim says the pandemic might change people's thinking about that. Let's just go to a place where you ask somebody, how do you feel about the impact of the virus in your own vehicle? I mean, I haven't got any data for this, but you know that dynamically people are going to want to keep control of their own spaces in the future.

And that includes their vehicles. The utility of our vehicles, I think, are even going to speak more highly to people because of what they had to face. When I was a kid, there were these commercials that said, have you driven a Ford lately? And Jim is working from his home now. I couldn't help but ask if he has driven a Ford lately. He says during the snow season, he took delivery of a GT500. That's like a higher-end Ford Mustang hot rod, and he says he was able to take it out for a spin this past weekend. It was such a relief from everything. My wife and I went on a really long ride together. Turned a lot of heads because there's so many people out walking. I wish I had a camera

following me because it was quite a statement. You can hear this vehicle coming. If we're thinking about the future of the car industry, one of the things I'm wondering about is how this downturn affects the uptake of electric vehicles, including Teslas. We think that Tesla's relative lead on electric vehicles might actually be improved coming out of the downturn as other auto companies pare back on what they might see as non-essential spending or reprioritize their liquidity. That's Adam Jonas. He's an analyst with Morgan Stanley. We think no longer term, you know, we'll look back on the crisis as a blip and that EV adoption was still marching on a more secular, you know, beat of sustainability, ESG, national government policy and consumer tastes.

That's an interesting thought. Right now, electric cars are relatively new. Just about every carmaker either has an electric vehicle on the market or is bringing one out soon. So the concern for Tesla is that competition is coming. But if Adam's right and other carmakers de-emphasize their electric vehicle programs to conserve cash, it could help preserve Tesla's technology edge. Meta, do you have a car? You're a city person, you don't have a car, right? I don't have a car.

I have had a car once. It's like five or six years ago. I bought a Volvo 240 and drove across the country. Really? And then we got rid of it. So I had a car for one month. And that was it. That's the total of your car ownership during your life.

Yep. And it was $2,000. That's amazing. You got such utility out of that car. The only period you owned it for, you got all the way across the country. Yeah, I think it's still driving around in New Orleans somewhere. $2,000, I guess these days that's a starter car. When I was a kid, your starter car was $300. I went through a string of $300 cars. cars. My first car, I wish I could tell you it was some kind of, you know, like muscle car, some kind of storied car that was weathered, but still cool. But the fact is it was a 1980 Volkswagen Rabbit with a diesel engine, left a trail of soot everywhere it went. I don't know if it had a zero to 60 speed, because I'm not sure that it ever went 60 miles an hour.

And every door handle, every window roller was broken. I spent half my time in the junkyard looking for parts for that car. And the worst part is, it was uncool enough driving a Volkswagen Rabbit, but it was beige. It was the actual color of a rabbit. Which didn't help matters. This is like the opposite story of like grease or something like that. You were just going to see me for just a second. No, the jackets, no muscle power. I don't think you're allowed to wear a leather jacket in that car.

I wanted to learn more about the outlook for the used car business and meta. I don't mean the clunkers like you and I used to drive. So I got on the phone with Seth Basham. Hi, it's Seth. Hi, Seth. It's Jack from Barron's. How are you? Seth is an analyst at Wedbush, and he says there's already been a big change in pricing. By some estimates, we're seeing used car prices decline as much as 10%.

And that's a rapid precipitous decline that we have rarely ever seen previously. It makes sense that prices for used cars would be falling because there's a big supply glut forming. Keep in mind that even though a lot of the car business is shut down right now, the supply of used cars continues to build. Think about cars coming off of leases or rental fleets selling cars. Seth says the supply demand imbalance won't last forever. As we move forward, production levels on the new car side should adjust and the price aggression on the used car side should also subside. So I don't think it's going to be as dire as it seems right now when we get to mid-late summer.

Then there are the store chains that sell parts, and that's a mixed bag. Right now the stores are closed and most people aren't driving, so business is terrible. But that business can also be counter-cyclical, meaning when people are strapped for cash, sometimes they hold onto their cars for longer, and they might need more repairs, and ultimately they might spend more money at car park chains. Seth likes AutoZone because he says it caters to do-it-yourselfers, and it has an ability to withstand a downturn. These guys should see higher sales as a result by the end of 2020 or into early 2021. And in fact, if you go back to the Great Recession, we saw just that. It took a couple quarters for these guys to start to see improved sales trends,

but they certainly did. That also sounds promising for Mark's question at the start of the podcast. If people are going to own cars for a little longer and need more repairs, and if that's ultimately going to help the chains that sell car parts to do-it-yourselfers, it might also ultimately be good news for service stations that provide repairs to people who don't want to do it themselves. So I'm hopeful that Mark's going to be just fine. Now we just need something that can get Sam back into that nail salon instead of painting service stations part-time. But that's a subject for another episode.

Meta, I can do one small thing to support the car industry because I get a new car every three years and I'll be due at the end of this year. It's going to be another minivan for me. Of course it is. I've heard so much about your minivan already. I am an outspoken advocate of the minivan that's true i feel they're not fairly represented in television and movies i mean you had that scene in get shorty with uh john travolta and danny devito and i don't know i felt like i detected a hint of mockery in what they were saying hey chili is this your ride yeah yeah, I like to sit up high and check everything out. I mean, it is the Cadillac of minivans.

Oh. Yeah, check this out. Wow. Then you had Furious 7. That's a movie about race cars, and one of the main characters is reduced, I guess you could say, to dropping a kid off at school in a minivan and he can't figure out how to work the door.

Alright, we made it, Jack. Yeah, we made it. Yeah, we made it. I just gotta find that door button. Buddy, where's the door button at, you know? I tell you who was furious seven about that is this guy right here. I didn't get a minivan because I had kids. If anything, I had kids to provide an excuse to get a minivan and the doors are one of the best part. Minivans

are cool and sliding doors rule. Sorry, Matt. I just had to get that off my chest. Oh, it's all good. Thank you for listening. Metalootsoft is our producer, and a big thanks to Brian Price, who helps us out every week. Subscribe to the podcast on Apple Podcasts, Spotify, or wherever you listen to podcasts. If you listen on Apple, please leave a review. Follow me on Twitter to find out about stories and new podcast episodes.

That's at Jack Howe, H-O-U-G-H. See you next week.